Duties of a Nonprofit Board of Directors
Understanding the IRS rules for your organization can be a daunting task for many nonprofits.
To assist each organization in ensuring they are abiding by their state rules, states have rules
that are outlined through state statutes. It is the responsibility of the organization’s Board of
Directors to ensure that they do not go against any state regulations.
The State Attorney General officially “owns” all nonprofit organizations. However, IRS rules are
not made to benefit one individual or party. Instead they are guidelines created to support and
regulate all nonprofit organizations. Because it is impossible for the attorney general to be
involved with every state 501(c)(3) organization, each nonprofit must have a Board of Directors
to be responsible for the activity of that organization. Board members take on fiduciary and legal
responsibility for all activity within the organization, holding them accountable for any unlawful
activity.
IRS Rules for 501(c)(3) Status
The IRS has outlined various rules and regulations every nonprofit organization must follow in
order to keep their 501(c)(3) status. Important definitions, different types of nonprofit
organizations, governance procedures, and tax and legal policies are all outlined in the IRS
Codes for nonprofit organizations.
Further, within each state, there are a set of regulations for organizations that are registered to
raise money there. Organizations should use these statutes as references when developing and
amending the organization’s bylaws and articles of incorporation. Failure to abide by the state
regulations can result in loss of 501(c)(3) status.
Although each state may have similar statutes for nonprofit governance, there can be places
where states may be more or less strict in some areas than others. For example,
For more information about Wisconsin State Statues click here.
For more information about New Jersey State Statues click here.
For more information about New York State Statues click here.
IRS Requirements of Boards
Any nonprofit Board of Directors functions as overseers of the activity of the organization. Their
oversight includes: Duty of Care, Duty of Obedience, and Duty of Loyalty. These three duties
separate a nonprofit Board from a corporate one. Each of these duties is important individually
as well as collectively.
Duty of Care ensures that each member has a certain level of reasonability in
representing the organization. This duty primarily relates to two essential components of
a nonprofit: financial management and oversight of the Executive. Because a nonprofit
organization cannot be owned, the financials must be maintained and managed by the
Board. It is their responsibility to ensure that the organization is using funds
appropriately and wisely. Because a nonprofit does not have an owner, there is an
Executive Director in place to manage the day-to-day operations of the organization. The
Executive Director carries a great deal of responsibility and power in the organization. It
is the responsibility of the Board to appoint an Executive Director and evaluate him/her.
The Board should have a close relationship with their Executive and be able to put full
confidence in them.
Duty of Obedience holds all members of the Board accountable to the IRS rules and
State Statutes for nonprofit governance. The Board is not only responsible for the lawful
operation of the nonprofit, but they also have responsibilities as governors to sit on the
Board.
Duty of Loyalty requires all members to be independent of the organization and to regard
their service as a member of the Board as their top philanthropic priority. This may mean
something different to each Board member but it is generally recommended that each
Board member make a financial contribution annually according to their means. Part of
the responsibility to raise funds for the organization involves Major Donor Cultivation.
Cultivation can be anything from: bringing a donor to the organization for a tour, having a
donor as a guest at an event, providing the organization with a list of names for appeal
letters, etc. For more reading on the Major Donor Cultivation of Board members, read
Cathedral’s paper on Major Donor Development.
Organizations should require their members to sign conflict of interest policies to ensure
they will always act in the best interest of the organization. Board members are selected
by the organization because of what benefit they can bring to the organization. These
members serve for the purposes of driving the organization toward success and are
expected to provide insight and influence in their role.
Each organization must interpret these rules and outline them for their Board. This should be an
important part of onboarding new members and aligning them with being a valuable part of the
Board. The responsibilities of members are outlined in the Bylaws which act in conjunction with
the Articles of Incorporation. The Bylaws allow an organization to outline responsibilities that
cannot be changed except by a vote of the Board. The organization may want to expand the
number of board members, number of meetings, voting methods or terms of office.
Director Development
Good organizations will ensure that all members of the Board are equipped with the proper
training and tools to succeed in their role. Some members may have prior Board experience that
they can draw on for their new Board role, but others may not be aware of any Board etiquette.
Best practices would tell any organization to always hold a Board member orientation when a
new member is brought on. This is a time when the Executive Director and other leaders of the
organization will sit down with the new member(s). Things to be done during this meeting
include: provide them with a Board Book containing all their Board materials, outlining the
expectations set for them and reviewing the organization’s history and mission.
Further Board development can be done through annual Board Retreats that bring together all
members and leadership of the organization to review organizational strategy and Board
responsibilities. Both practices are helpful in sustaining an active and successful Board of
Directors. Annual Conflict of Interest Policies should be signed by members as a way to renew
their loyalty and commitment each year.
Conclusion
The IRS and state government entrust nonprofit organizations with a great deal of power and
freedom to operate and govern. It is the responsibility of the Board of Directors to ensure that
the organization is operating lawfully. The duties of Care, Loyalty, and Obedience have been
outlined to help members understand their roles. The accountability for any action taken by the
nonprofit falls to them. By following these duties, members should be able to govern the
organization well. Both the success and failure of the organization falls to them, making their
role extremely important. To ensure that all members are in line with the required duties of their
position, the organization should have proper Board training to set them up for success.
Peter Giersch is a Managing Director, Virginia Zignego is a Senior Associate, and Jessica
Zignego is an Associate in the Milwaukee Office. This article was written for our Topic of the
Month in 2015 as part of our General Executive Counsel program.
For more information, please visit Cathedral Consulting Group LLC online at
www.cathedralconsulting.com